Helping DC Plans Improve Investment Outcomes
A manager of managers fund aims to achieve its objectives by selecting differentiated managers and giving them a mandate to make investment decisions on behalf of the fund. The rationale is that diversification and balance can be better achieved by allocating assets to more than one manager, each with a distinct style. The manager of managers role is to select the managers, monitor performance and risk, and alter the composition of the fund to adapt to market conditions.
Scott Brooks, head of defined contribution at SEI, explains the concept, using the example of small/mid-cap (SMID) funds. With the traditional approach, a plan sponsor may offer participants a SMID Value fund, a SMID Core fund and a SMID Growth fund to cover the risk/return spectrum. With SEI’s U.S. Small/Mid Cap Strategy manager of managers fund, participants can select the one fund and get access to 10 underlying sub-funds—which include some that defined contribution plan sponsors would typically never offer to participants, such as an opportunistic value fund or a real estate investment trust (REIT). “The participants only see one SMID fund [on their DC plan investment menu]; it makes participants’ lives easier,” Brooks notes.
Research from SEI shows defined contribution plan sponsors tend to offer far more investment fund options than the number actually used by the average participant. While it is important to offer participants the opportunity to diversify retirement assets, an overly complicated fund lineup can make it challenging for even well-informed investors to choose appropriately. SEI found that the disparity between offerings and participant demand is driving sponsors to consolidate the number of funds offered in the core lineup.
SEI has been serving defined benefit (DB) pension plans since the 1980s and started its manager of managers business in the ’90s. Brooks tells PLANADVISER, this approach lets smaller firms get access to the same number and caliber of investment managers that large firms are able to access. He explains that different asset managers have separate minimum asset requirements for investment accounts—say, $25 million to $50 million—so, it would take around $1.5 billion in assets to gain access to around 40 fund managers to achieve diversification. However, with SEI, firms with small retirement plans can access those same managers since their assets are pooled with those of other investors.
“Since SEI is a large-scale institutional investor, kind of like CalPERS, we can place sizeable assets with managers,” Brooks says. “Which also allows us to negotiate competitive fees.”
SEI recognized that this advantage would also be a benefit to defined contribution plans. It serves as a 3(38) investment manager for the plans, which, Brooks says, is the same concept as an outsourced chief investment officer (OCIO) for pensions, “but DCs don’t embrace that terminology.”
According to Brooks, there are three primary capabilities SEI can offer, including co-fiduciary oversight of the entire investment menu; target-date fund (TDF) offerings, including custom; and collective trusts providing manager of managers investment options. Big benefits for defined contribution plans, he says, include the potential for lower costs, as well as broad access to best-in-class asset managers. The manager of managers approach offers a similar level of alpha, but lower risk, for DC plan investments—DC is becoming more institutionalized, Brooks adds.
He stresses that what defined contribution plans get with a manager of mangers approach is an added layer of protection at no additional cost compared with what they currently offer participants. For example, he says, SEI’s large cap strategy’s cost of 50 basis points (bps) is very competitive compared with a single manager’s 55 bps to 60 bps cost, and the plan sponsor also gets co-fiduciary protection and better response to the market.
Brooks notes that at SEI, there are 100 people in the investment management unit whose job is to talk to managers every day and change investment portfolios according to what is changing with those managers. Without this oversight, it takes time for plan sponsors to make changes on their own. An investment committee that meets only once a quarter may not discover a problem until it has adversely affected the fund for a while, but SEI can quickly swap out funds because staff has been talking to other similar mangers, he says.
“The process [of changing investment funds] can be reduced from 270 days to conceivably as little as one day,” he adds. “If we found a Bernie Madoff, we could fire him the next day, whereas a committee may not have found [the problem] as soon and it would take longer to change.”